How Will a Rate Rise Impact the P2P Lending Space?

Britain has been warned: the first rate rise since the financial crisis is coming.

Governor of the Bank of England Mark Carney confirmed last week that the long window of 0.5% borrowing costs is coming to a close. Mr. Carney stated that the base rate cost of borrowing is likely to climb to just over 2%. That amounts to half of the average historic norm between the founding of the central Bank in 1694 and the present. Nonetheless, the rate rise will likely have a marked impact on the lives of Britons. Mr. Carney explained:

“It would not seem unreasonable to me to expect that once normalization begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages. In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”

Broadly speaking, a rise in the base rate equates to a greater cost of finance for borrowers, and better returns for savers. A base rate rise has often been cited by experts as a crucial juncture for the alternative finance space. The most frequently mooted point is that rising interest rates for traditional savings accounts may serve to devalue the central USP (superior returns) of the typical peer-to-peer lender.

But is there weight to such assertions? Will P2P rates rise in tandem with the base rate? Will borrowers begin to branch away from increasingly expensive traditional suppliers of credit? We sought answers from a handful of the UK peer-to-peer sector’s most prominent figures.

Giles Andrews, CEO of Zopa, sees a rate rise working in favour of the banks, but not in favour of their customers:

“Any rise in base rates will benefit both our lenders and borrowers as bank spreads will increase as they always do as interest rates rise. Commentators have been talking about the prospective increase in bank profitability as interest rates rise and that will have to be paid for by consumers, making our alternative proposition even more compelling.”

RateSetter’s Rhydian Lewis was broadly in agreement – suggesting that a rise in bank borrowing rates is deeply unlikely (owing to a lack of transparency on the one hand and to customer inertia on the other) to translate to commensurately higher interest rates for savers. Rhydian went on to opine on the potential significance of RateSetter’s dynamic marketplace:

“Our rates are set by our investors and borrowers – we call this the ‘People’s Rate’. The way we see the world is that you have the official Base Rate – set by the “rate-setters” of the MPC at the Bank of England – and you have the Wholesale Rate which is called LIBOR and is set by a panel of banks. We want the rate set in the RateSetter market to be seen as the Retail Rate – the rate at which hundreds of thousands of people are actually transacting in the real world. Logically, you’d expect any rise in the Base Rate to feed through to a rise in the RateSetter rate – but maybe, in time, our marketplace could become a leading indicator and we will see expected rate rises priced in by the crowd before any official rate rise takes place.”

LendInvest boss Christian Faes believes that his platform is largely immune to the effects of a base rate rise: 

"It will be very interesting to see what happens in the P2P market when interest rates start to rise. There is one thing for sure in this life: death, taxes - and now certainly, that interest rates will rise at some stage. At LendInvest, our short-term mortgage lending is not that sensitive to interest rate movements. The lower yielding unsecured consumer platforms, could come under some pressure, as investors start to have better options from bank account-type investments. At LendInvest, we will always be able to offer a significantly better return than a term deposit from a bank, and will over time, will prove to be a very sound investment due to the fact that all of our lending is secured against property."

Rising borrowing rates might also lead to a spike in borrower defaults, a risk that the P2P platforms (which are not covered by the FSCS) will be acutely aware of. 

But as our probing demonstrates, the major peer-to-peer platforms – far from living in fear of a higher interest rate environment – are in fact rather upbeat about the impact of a rate rise.